Green bond premium diagnosis: An interplay of repayment obligation structure

This paper examines at-issuance yield (price) differential between green and non-green bonds. The paper also checks the sensitiveness of the differentials to the repayment obligation structure of the bonds. For this, we test for differentials in the standard and revenue segments separately. From Bloomberg®, we extract US municipal green bonds from 2014 to 2023 and apply propensity score matching to generate sample sets comprising 26440, 23848, and 11702 bonds. Through univariate tests and OLS linear regression, we document lower yield for green bonds compared to non-greens (i.e., negative yield differential implying the existence of green premium) ranging from 2.7 to 6.9 basis points, implying cost savings to green issuers. The results are robust to alternate measuring variable and surrogate matched samples—the premiums decline in a non-pro-environmental regime and the pandemic. Green investors perceive higher risk in counties with higher pollution index. The premiums enlarge in the standard segment compared to revenue because of greater trust in the recourse feature than revenue stream collaterals. Citing the lack of tangible municipal revenue streams in emerging economies, our findings endorse the standard (general obligation) green bonds to raise finance at initial stages and create revenue-generating infrastructures.